Chemical company Avantor Inc. has taken the first steps towards a public offering. Its SEC filing uses the standard placeholder figure of $100 million, but Renaissance Capital reports that this company could raise up to $1.5 billion. Avantor is owned by private equity firm New Mountain Capital, and this IPO is underwritten by Goldman Sachs and J.P. Morgan.
As we do not know the pricing terms nor Avantor’s aimed market capitalization, it is not possible to conclusively state whether Avantor is a good buy or not. For now, here are some of the fundamental facts which investors will need to pay attention to for this IPO.
Company History and Growth
Avantor was first founded as J.T. Baker in 1904, and was acquired in 2010 by New Mountain for $280 million. In its own words from its S-1 filing, Avantor provides “approximately six million products, including products we make as well as products from approximately 4,000 core suppliers across the globe.” In addition to products such as chemicals and reagents, Avantor also provides services such as “Onsite lab and production, clinical, equipment, MarketSource procurement & sourcing and biopharmaceutical material scale-up and development.”
Avantor also appears to have solid opportunities for growth. It is currently on focused on expanding overseas, particularly in China, Southeast Asia, and Eastern Europe. It has a strong focus on healthcare, which will continue to grow in importance across most of the world thanks to aging populations. Avantor also operates in the education and government industries, and government spending could also ramp up in coming years in scientific endeavors, as shown by growing Democratic concern over climate change.
Fundamentally, Avantor’s business appears to be set on a solid footing. It is not overly dependent on any one industry or geographic region as its businesses are well spread out, and it has potential to grow.
Avantor’s Finances and Mergers
But while Avantor’s business has potential to grow, there are some financial caveats which are obscured by recent transactions. In 2016, Avantor purchased Nusil, a supplier of silicone products. In 2017, Avantor purchased laboratory supplier VWR Corp. for $6.4 billion.
As a result of these mergers, Avantor’s revenue dramatically rose for reasons other than growth. Revenue went from $517.7 million in the nine months ending September 30, 2017 to $4.4 billion in the same timeframe in 2018. This eightfold growth largely happened because VWR was folded into Avantor, but Avantor does point that $400 million of the $3.8 billion increase did come from growth.
While the business is much larger now, Avantor faces some financial difficulties. Avantor fell from a net income of $12.7 million in 2015 to a net loss of $145.3 million in 2017, though net losses then shrunk to $33.6 million in the nine months ending September 30, 2018.
But the much bigger concern is Avantor’s indebtedness. Avantor reports that as of September 30, 2018, it had $7.2 billion in outstanding debt and $8.2 billion in long-term liabilities due to its recent acquisitions. The situation is not too dangerous as $7.1 billion of the debt will not be due for over five years and Avantor does own over $10 billion in total assets. On the other hand, Avantor is threatened by an inconsistent cash flow which has been both positive and negative over the past few years.
Investors may also be discouraged by how Avantor intends to use the raised IPO funds. The company issued $2 billion of Senior Preferred stock to VWR investors upon acquisition, and it will be using the raised funds to buyback those shares. Any remaining funds would be used for general corporate purposes, but Avantor will more likely have to occur more debt for any further buybacks. Still, while Avantor’s financial picture could be made clearer over time as it finishes integrating various sections of VWR, its financial health appears generally positive.
IPOs are always risky, and we cannot firmly state whether Avantor will be a good buy until we know its planned valuation and how much it aims to raise. But there is a lot to like about this business. It has potential to grow, has a stable financial condition despite some concerns, and has good underwriters.
While it will be some time before investors can make a firm decision, Avantor should be watched during the roadshow and when it announces its pricing. Depending on the price, Avantor could be one of the better IPOs of 2019.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.